Muskonomics: strong ties between Tesla, SpaceX and Solar City. A smart business model or a dangerous bet?

Tesla Motors, the automotive startup that reshaped the automotive industry with its premium electric cars, has just released its first quarter results confirming the Wall Street expectations and boosting even more daring forecasts for the next quarters sales after the launch of the new Tesla Model 3. A general overview to the company’s performance shows a +45% in the year over year sales figures, but many observers are concerned about a possible market saturation. The company bets even more resources on the increase of the demand, considering the product as a mass appeal car that would lead to an easy but daring goal set by Elon Musk to sell 500.000 vehicle per year after 2018. Meanwhile the company continues to lose money in the short term and to invest huge resources in R&D and production to scale up and gain the high scale benefits every manufacturing company crave. The huge Tesla Gigafactory plant is an amazing example: a huge building in the middle of the Nevada desert that’s supposed to cut by 30% the battery pack costs and produce an impressive battery device output to feed a raising demand of super accumulators.

Elon Musk companies: great ambitions for the co-founder of PayPal and Zip2

Meanwhile many observers are making questions about the pretty unusual business model Elon Musk’s has set up for his companies Solar City, Tesla Motors, SpaceX. The three companies are strongly connected each other in a Japanese-like model that is pretty close to the keiretsu. Practically Musk tied up the companies through strong connections in financial and production aspects. Every manufacturing startup (like Tesla and Solar City) is usually making its best efforts to gain scale, increase the production and sales volume and consequently gain a better bargaining power on labor and supply, together with a lower production cost per unit and a strong capital basis to finance R&D and technology investments. Solar City needs a lot of short term cash, to cover the high investment costs in production, marketing and installation of its products, usually paid via leasing contracts with a common mid term revenue. Solar City, to cover the lease payback lead time, relied on traditional strong investors that don’t fear a mid term capital immobilization such as banks or institutional investors. On the other side SpaceX has a pretty different business model in which it gains a lot of cash upfront thanks to huge contracts with government clients and private customers, selling space on the upcoming shuttle or satellite launches. Instead of investing all these resources in ultrasafe financial products like government bonds (like every other competitor would have done) SpaceX bought more than $165 million of Solar City bonds. It’s practically a win win agreement: Solar City gains cash to cover its short term high costs, and SpaceX gains a better interest rate (4.4%) on mid term bonds from a sister company.

Tesla sales in the last six quarters. Elon Musk has set an ambitious goal: reach 500.000 vehicles sold per year in 2018. A fair bet!

Meanwhile Solar City increasingly needs a reliable supply of battery packs to install its products, assumed that solar panels need to store the power generated to face a 24 hours demand from the grid, while the solar energy production relies to the 8-10 hours of daylight period, and a high quality battery system is a plus of a winning commercial solution like the Solar City one. Solar City buys its batteries from Tesla Gigacity factory. One more win win agreement: a good supply of batteries at a good price, and a key customer outside the automotive industry for Tesla to scale up its battery production and keep the sales high.

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Brilliant move? Let’s say it’s working when everything works. But someone’s asking how can we identify the real, actual benefit for the counterparts in these Muskonomy transactions. Assumed that shareholders in the US are supposed to have the full control of the company, it’s hard to tell which part is gaining the most from the win win agreement. Slate for example is wondering <<What if there’s high demand for battery packs, and other solar companies are willing to pay more than SolarCity for the output of the Gigafactory? It would make more sense financially for Tesla to serve those other customers first. But doing so would like cause problems for SolarCity>>.

Therefore we shouldn’t underestimate the contagious effect of such a relationship. If Tesla Gigafactory experiences troubles in the production, the consequences are bad for Solar City relying on the battery, and could quickly lead to financial suffering for SpaceX owning its bonds.

These are legitimate doubts for the future. Meanwhile reality is proving Elon Musk is right.

Gigafactory is one of the largest production plants in the world. Compare it with the Boeing production plant and the Dallas Cowboys stadium. Not bad…